The Market Price of Credit Risk: An Empirical Analysis of Interest Rate Swap Spreads

Topics:
Investment and Capital Markets
Tags:
Analysis,
Research & Development,
Market Price,
Investment,
Interest Rate,
Financial Services,
Financial Planning,
Finance,
Business Operations,
University Of California At Los Angeles
Source:
UCLA

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Overview: This paper studies the market price of credit risk incorporated into the most important credit spreads in the financial markets: interest rate swap spreads. The approach consists of jointly modeling the swap and Treasury term structures using a four-factor affine credit framework and estimating the parameters by maximum likelihood. It shows that most of the variation in swap spreads is driven by changes in the liquidity of Treasury bonds rather than changes in default risk.

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Format: PDF | Size: 629KB | Date: Oct 2000 | Pages: 44

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